Separating Fact From Fiction on the Fed's Loans

It sounds like a great story: The Federal Reserve lent the banks $7.7 trillion during the financial crisis. And Congress wasn't told.

But it isn't true. Even if Jon Stewart says otherwise.

ENLARGE

The Fed and the taxpayers did bail out the banks, including some that occasionally pretend otherwise today. The Fed lent enormous sums: $1.6 trillion in emergency loans and individual bailouts at the December 2008 peak. The Fed has been too secretive in the past. The Fed deserves some blame for not preventing the crisis. The Fed executed some aggressive plays during the crisis that demand post-game scrutiny.

WSJ's David Wessel separates fact from fiction behind the Federal Reserve's 2008 loan to banks at the onset of the economic downturn, thought by some to have totaled $7.7 trillion. AP Photo.

But lending against collateral to solvent, but cash-short, banks during a panic isn't among the Fed's more controversial moves. That's what central banks have done since 19th-century England. And the Fed didn't lend anywhere near $7.7 trillion. Nor did it keep the size of its lending secret, though it did unsuccessfully try to keep the borrowers' identities secret.

How did this get started? Blame the law of large numbers (large ones crowd out smaller, more meaningful ones) and the delight we all take in revealing and learning secrets (even if they aren't really so secret). Why does it matter? Because widespread misunderstanding of what the Fed does and actually did can cripple it in taking steps to protect the economy in a future crisis. That's why Fed Chairman Ben Bernanke protested Tuesday what he described as "egregious errors" in some reports, and released a staff memo with details. (Full disclosure: My 2009 book, "In Fed We Trust," recounted the Fed's handling of the crisis favorably.)

Since the onset of the financial crisis, reporters have been trying to add the components of the bailout—loans, guarantees, stock purchases—to come up with a grand total. In December 2008, when the crisis was still unfolding, this newspaper wrote: "Using the most expansive counting possible, the U.S. has pledged to spend, invest or loan as much as $10 trillion....Yet the final tab is likely to be much, much smaller."

Bloomberg did a similar exercise in March 2009, tallying what it said the government had "spent, lent or committed." By that metric, the government total was pushed to $12.8 trillion and the Fed's share to $7.7 trillion.

In fact, the Fed never came close to "committing" to lend that much. The total reflects not what the Fed had actually laid out nor the sum of its promises. Rather, it adds the ceilings set on a number of emergency programs, some of which were more hype than reality. It counted, for instance, $900 billion for something called TALF (for Term Asset-Backed Securities Loan Facility), based on Treasury statements that the program might someday reach that size. In fact, the Fed board authorized up to $200 billion in loans, and actually lent $71 billion.

At first, the $7.7 trillion got only a bit of attention. Then the Fed, its hand forced by Congress and the courts, revealed what it had wanted to keep secret: Which banks borrowed how much and when.

In July 2011, the Government Accountability Office took the Fed data and listed the biggest borrowers: Bank of America and Citigroup were at the top. A month later, Bloomberg published the fruits of its own number crunching, an extensive bank-by-bank tally of what it labeled "secret loans." Last month—long after the Fed had shut its emergency lending window—Bloomberg recycled that work in a story that included this sentence: "Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year."

This time the figure got attention. Jon Stewart on "The Daily Show": "We ultimately sent the banks $7.7 trillion...That's TARP, the worst program in U.S. history times 11." CNN: "For the first time we have details now on how much money the U.S. Federal Reserve doled out to U.S. banks. And the number? $7.7 trillion." The New York Times: "Among all the rescue programs set up by the Fed, $7.77 trillion in commitments were outstanding as of March 2009, Bloomberg said."

Actually, at the end of March 2009, the Fed had $1.3 trillion in loans outstanding, both emergency-liquidity loans and those made in the rescues of Bear Stearns, American International Group and others. And that was no secret: It was posted on the Fed website.

After Mr. Bernanke's letter was released Tuesday, Bloomberg spokesman Ty Trippet said, "We have met with the Fed numerous times on this issue and not once has the Fed ever told us our reporting on this issue is inaccurate." The amount, $7.77 trillion, was never characterized by Bloomberg as money lent by the Fed, Bloomberg said. However, other news outlets have mistakenly done so.

Fault the Fed for failing to head off the worst crisis since the Great Depression. Ask if the Fed should have let Bear Stearns go under or could have saved Lehman Brothers from bankruptcy six months later. Ask why it paid AIG's counterparties on derivatives contracts 100 cents on the dollar. Ask if the Fed failed to push Congress hard enough to prevent banks from growing "too big to fail." Ask if the Fed is doing too little now to sustain the economy or so much that it is sowing the seeds of inflation.

There's plenty to argue about, without turning to inflated numbers. The actual facts are stark enough.

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